Business owners are not exempt from the cycle of life, and given the complexities of owning and running a business, they should most certainly have a will in place. Sadly, many do not, and their families are left to cope with grief as they sort out the deceased’s business affairs. Ensuring a will is in place, and keeping it up to date and, if necessary, renewed every three to five years or when circumstances change, is good practice.

As to when to renew a will, several specific circumstances make the matter more urgent. These include getting married or entering into a civil partnership as this invalidates any previous will; getting divorced or separated as a will would still stand afterwards unless altered; when a spouse or civil partner dies; if children or grandchildren come along; if children predecease the person with the will, and where a business is sold and there is cash in the estate rather than a business asset.

IMPORTANCE FOR BUSINESS OWNERS

For Elaine Skelton, a director at chartered accountant BHP, it is essential for those running their own business or who are a director of their own company to have a correct will in place. “Without a will, their estate will follow the intestacy rules and their business assets may be inherited by a spouse or family member who knows nothing about the business and does not have the skill, knowledge or appetite to run it,” she notes.

Worse, she points out that for partnerships: “If there is no will and partnership agreement in place, the business could be dissolved automatically on the death of a partner.” If this were the case, regardless of how many partners remain able or willing to carry on the business, the surviving partners would have to sell off the business and its assets.

A will, when correctly drafted, can also be used for tax planning. As part of the planning process, Ms Skelton says that steps may be taken to ensure business assets qualify for Business Property Relief (BPR), which exempts business assets from inheritance tax (IHT).

IN TRUST

Ms Skelton highlights another option available to those planning a will – use of a trust: “If the will is drafted in a particular way, it is possible to reduce the overall IHT liability payable by the estate.” Mechanically speaking, she says that this is done by putting BPR assets into a trust so that no IHT liability would be payable precisely because of the availability of BPR. 

The surviving spouse or other family members would be able to benefit from the trust’s assets, but the value of the assets would be outside their estates. All other assets chargeable to IHT would be left to the spouse and family members. They could then use these chargeable assets to purchase the business assets from the trust. And once the BPR assets have been owned by family members for two years, BPR would once more be available on the business assets, making them again exempt from IHT. 

But even where a business owner has a will and leaves their shares in a tax efficient manner, Ms Skelton warns that they should also have a shareholder or partnership agreement in place to ensure that the estate is dealt with properly. “All business partners should be aware of what happens when one of them dies and how they need to act,” she says.

Where a will leaves shares or business or partnership interests to anyone other than business partners, she recommends a ‘cross option agreement’ to make sure “surviving business partners have sufficient funds to purchase the shares from the deceased’s family members under the terms of the shareholder or partnership agreement.”

NIL RATE BANDS

Another consideration for trusts is the family home. Here, Ms Skelton advises: “Ensure that the correct type of trust is used, so that the Residence Nil Rate Band (RNRB) remains available.”

The Nil Rate Band (NRB) – currently £325,000 per individual – is the amount of an estate which is effectively exempt from IHT. This amount is available every seven years, so it is possible to make substantial gifts to the family every seven years to reduce the eventual IHT bill.

In addition, an RNRB of £175,000 per person, is currently available if an estate is inherited by children and grandchildren. But this is only available if an estate is worth less than £2 million. “The RNRB is reduced by £1 for every £2 the estate is over this limit,” says Ms Skelton. Married couples or civil partners therefore have total exemptions of £1m before any IHT is paid if their estate is below £2m (£325,000 NRB and £175,000 RNRB for each spouse).

A trust’s assets remain in the estate of the surviving spouse, but further will planning can be undertaken to mitigate any IHT liability. In simple terms, Ms Skelton says: “A will can be used to pass assets down the family line in a tax efficient manner by utilising the spousal exemption at first death so that the spouse inherits everything without an IHT deduction, either directly or via a trust.”